Jaitley performed a feat of linguistic gymnastics

Kitty Miv, Editor24 July, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

I was surprised to learn recently that when it comes to pursuing policies of free trade, Mexico is one of the world's leading lights. Mexico currently has free trade agreements with over 50 countries, individually and as a result of its participation in regional trade arrangements like NAFTA with Canada and the United States, making more than 90 percent of its trade more or less free. Mexico's not stopping here either: it formally joined negotiations for the expanded Trans-Pacific Partnership in 2012, and more recently has sought to tie up free trade deals with Jordan and Turkey, having agreed to launch formal negotiations with the former and concluding the first round of talks with the latter. Why should this be such a surprise? Well, it has to be said that the large emerging economies don't have brilliant track records when it comes to upholding trade rules. But don't take my word for it: a report on trade-restrictive measures by the EU last year described a worrying upsurge in the use of trade barriers since the financial crisis. And the vaunted "BRICS" economies are well represented among the worst offenders: between October 2008 and June 2013, the EU observed 59 trade barriers in Brazil, 99 in Russia, 33 in India, 36 in China and 45 in South Africa. Unsurprisingly, given the way in which it has been governed in recent years, Argentina topped the list with 147 trade-restrictive measures. Mexico was observed to have used just two. Not that the EU is above reproach here either. But that is for another day!

Arun Jaitley's first national budget as Indian Finance Minister comes at a critical juncture for India. Most economists would probably agree that India should be challenging China and the major advanced economies a lot harder than it is right now, but the reason it isn't is because its enormous economic potential seems to have been squandered. Jaitley's declaration that he is "duty bound" to usher in a policy regime that will result in higher growth seems to have been generally well received by those with a stake in the Indian economy. But excuse me if I play the contrarian here! True, the budget eases some barriers to foreign investment, and places an emphasis firmly on investment in industry and infrastructure which is sorely needed. But after leading investors to believe that the previous Government's retrospective tax measure – the thing that has done the most damage to India's international credibility – would be consigned to history, Jaitley performed a feat of linguistic gymnastics in his budget speech that seemingly endorsed and condemned retrospective taxation all at the same time. The upshot is that the Government won't introduce retrospective tax laws that lead to "fresh" tax liabilities, but existing cases resulting from the 2012 amendment must proceed to their "logical conclusion," whilst a committee will be set up by the tax authorities to examine future cases that arise. At least I think that's what he meant. Either way, it kind of undermines Jaitley's repeated pronouncements on the importance of tax certainty, especially with the Direct Taxes Code once again kicked into the long grass. But then perhaps we shouldn't rush to judgment: the BJP has only just got the keys to the house, and the social and economic challenges facing India are enormous. Rome wasn't built in a day.

Something has gone very wrong somewhere when an American passport, historically that most prized of possessions, is considered a curse rather than a blessing. But the statistics don't lie: the Treasury Department's own figures show just over 1,000 people handed back their passports or their green cards in the first quarter of 2014, an increase of almost 50 percent compared with Q1 2013. And this is no freak either, because these numbers have been steadily rising for the past two or three years. What these raw figures don't tell us is why people are turning their backs on America in increasing numbers, and there could be any number of reasons, political or practical. However, let's face it, most of us are thinking it: tax is the reason. But more specifically FATCA, which went into full force (almost) on July 1. A survey by the De Vere Group would seem to verify anecdotal evidence that FATCA is behind the jump in the number of Americans renouncing their citizenship. When set against a US expat population of around 6.3m, and an overall US population of almost 320m, the numbers taking foreign citizenship are small however, and the majority of Americans might wish them good riddance anyway if they are so determined to avoid their tax obligations that they would rather become a Costa Rican, a Panamanian or a Singaporean. Perhaps attitudes might be a little different if there was more widespread awareness of FATCA, "the worst law that most Americans have never heard of" as that anti-FATCA campaign group calls it. Still, only a small fraction is going to be affected by it, so why should they care? Which is presumably one of the reasons why FATCA sneaked in under the radar in the first place.

The IMF has been at it again, sticking its nose into national tax policy where most of the time it is probably not wanted. Like the OECD, the IMF seems to think that the answer to every economic and fiscal problem is to raise taxes. Recently the newswires have been replete with reports of the IMF advising a VAT hike here, recommending new taxes there and generally being a bit of a bore. For example, it has urged Bahrain to introduce a comprehensive income tax, warned Slovakia against cutting VAT and chastised the Czech Republic for having the audacity to consider introducing a new lower rate of VAT. Governments normally only publicly respond to Article IV reports when they agree with the IMF's conclusions, because in doing so they are lending some credibility to their economic policies. It was refreshing then to hear Spain effectively thumb its nose at the Fund and its advice to raise excise duties and environmental levies and reduce VAT breaks. As the IMF observes, Spain has made a remarkable recovery given the trouble it was in just a couple of years ago. Growth has resumed, unemployment is falling, exports are up and financial conditions have improved markedly, with the country's sovereign debt yields at record lows. Perhaps it has now earned the right to cut taxes on its long-suffering citizens and business, which it is planning to do. The IMF seems to have endorsed the proposed tax reform package, but weirdly the Fund also said that Spain could reduce unemployment faster by cutting social security contributions and raising indirect tax. It is hard to disagree with the former suggestion. Without picking my way through the IMF's detailed analysis, I'm struggling however, to understand how raising indirect tax will be "critical" to boosting employment. Perhaps this is one of those examples of where higher taxes are good.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 114th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at plus 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

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